Price-to-rent ratio, explained

The formula

Price-to-rent ratio = home price ÷ (12 × monthly rent). You are dividing the price by a year of rent for a comparable home, so the answer reads as 'years of rent'.

Suppose a home sells for $600,000 and a similar one rents for $2,300 a month. Twelve months of rent is $27,600, and $600,000 ÷ $27,600 gives a ratio of about 21.7. Read in plain language, the price equals nearly 22 years of rent.

What a higher or lower ratio suggests

A lower ratio means homes are cheap relative to rents, which tends to favour buying. A higher ratio means homes are expensive relative to rents, which tends to favour renting. The inverse is the gross rental yield: a ratio of 20 means annual rent is 5% of price, which is the same threshold used in the 5% rule.

No single cutoff separates 'buy' from 'rent' for everyone. The right dividing line moves with your assumptions, as the next section shows. Think of the ratio as a thermometer, not a verdict.

Where the dividing line actually sits

The calculator can solve for the starting rent at which buying and renting finish equal at your horizon, and that rent converts directly into a break-even ratio. Using the $600,000 example (20% down, 4.5% mortgage, 25-year amortization, Alberta-style costs, 3% rent growth, 5.5% investment return), here is how the dividing line shifts. All are illustrative inputs, not market data.

Reading the table

Our example home has a ratio of about 21.7. Over ten years that is below the break-even of 24.2, so buying finishes ahead (by about $41,686 in this scenario). At a five-year horizon, 21.7 is right at the break-even and the result is essentially even (−$4). At three years the break-even ratio is 17.9, so a ratio of 21.7 sits above it and renting leads.

The ratio's meaning also depends heavily on price growth. At 0% appreciation, only a ratio near 15 supports buying over ten years; at 5%, even a ratio above 35 does. And the mortgage rate matters: at 3.5% buying is justified up to a ratio of 28.3, while at 6% the cut-off falls to 19.8.

Make sure you are comparing like with like

A ratio is only as good as its inputs. Use the rent for a genuinely comparable home, not a smaller unit or a different property type. A detached house and a one-bedroom condo in the same city can produce very different ratios, and rents for older tenancies may be well below what a new tenant would pay.

Condo fees complicate the picture as well. If you buy a condo, the monthly fee is an ownership cost that the ratio ignores. Use the condo vs rent tool when fees matter. Also check that your rent figure is for the same kind of lease and the same utilities arrangement.

• Use rent and price for similar size, age, location and condition
• Adjust for who pays utilities and whether parking or storage is included
• For condos, add the monthly fee and check for special assessments
• For rentals under rent control, remember that today's rent may not reflect what a new tenant would pay

Comparing ratios without quoting market figures

You do not need published market ratios to use this idea. Collect a handful of current asking prices and rents for homes that are truly comparable, compute the ratio for each pair, and see how they cluster. Then compare your range with the break-even numbers your own assumptions produce.

If your ratios are consistently below your break-even, ownership is a serious candidate. If they are consistently above it, renting probably wins on the numbers unless you believe prices will rise faster than your assumption. Either way, do not stop there; the price-to-rent tool and main calculator include the costs this single ratio hides.

Limits worth remembering

The ratio ignores the down payment's opportunity cost, closing and selling costs, mortgage renewals, property-tax differences, and how rents and prices change over time. It also says nothing about whether you can qualify for a mortgage, which depends on the stress test. Use it to ask better questions, then answer them with the full comparison.